Not all equity index annuities are created alike. Such annuities use a specific stock index to create the potential for increased interest earnings. The overall movement of the underlying index generates those earnings, which are credited to the annuity through specific interest-crediting formulas. The manner in which earnings are credited is what sets one annuity apart from another.

There are a variety of interest-crediting formulas, and some are more popular than others:

· Point-to-Point Cap—This strategy establishes a predetermined interest earnings cap that is usually guaranteed for one year. If the percentage increase in the underlying index exceeds the cap, the annuity is credited with 100 percent of the allowed earnings percentage. If the underlying index increase falls short of the cap, the annuity is credited with 100 percent of the index’s gains. However, if the index decreases, the annuity maintains the value it had at the beginning of the year. Interest is credited annually.

· Point-to-Point Participation—This strategy uses a predetermined participation rate for crediting interest. That means that the annuity is credited with a certain percentage of whatever the underlying index earns. Interest is credited annually. Once again, if the index decreases over the period, the annuity maintains the value it had at the beginning of the year.

· Monthly Average—This strategy compares the index value at the start of the contract year to an average of the 12 monthly index values throughout the contract year. There is no predefined cap, but there is an annual interest spread that is subtracted from the percentage of earnings before they are credited to the annuity. Just as in the two previous crediting strategies, the beginning value will be maintained if the index decreases.

· Monthly Point-to-Point—This strategy also uses monthly values as opposed to annual values. However, it sets a cap on each month’s earnings. The cap is applied to each month’s earnings whether the index increases or decreases. The sum of the 12 monthly values is then calculated to produce the total return. If the year’s total return is negative, a limit is placed at zero.

Before you buy an equity index annuity, talk to your insurance agent about the pros and cons of each interest crediting strategy. Your agent can help you determine which one is best suited to your financial situation. Remember, no one can predict the future market behavior of an index. That’s why you need to carefully consider your options before you buy an equity index annuity.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

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